This paper analyses some of the challenges posed by the Covid-19 shock in Colombia, describes the monetary policy response and discusses the effects on the fiscal position. Evidence is presented for non-linear responses of EME risk premia (CDS) to their determinants, depending on the public debt-to-GDP ratio and the distribution of the risk premium. These findings are introduced in a DSGE model that includes the fiscal sector for Colombia (COFFEE model) to illustrate how increasing public debt levels may constrain monetary policy through a higher sovereign risk premium and a higher responsiveness of the latter to shocks affecting its fundamentals.
